Abstract
Recent changes to the common agricultural policy (CAP) saw a shift to greater market orientation for the EU dairy industry. Given this reorientation, the volatility of EU dairy commodity prices has sharply increased, creating the need to develop proper risk management tools to protect farmers’ income and to ensure stable prices for processors and consumers. In addition, there is a perceived threat that these commodities may be replaced by cheaper substitutes, such as palm oil, as dairy commodity prices become more volatile. Global production of palm oil almost doubled over the last decade while butter production remained relatively flat. Palm oil also serves as a feedstock for biodiesel production, thus establishing a new link between agricultural commodities and crude oil. Price and volatility transmission effects between EU and World butter prices, as well as between butter, palm oil and crude oil prices, before and after the Luxembourg agreement, are analysed. Vector autoregression (VAR) models are applied to capture price transmission effects between these markets. These are combined with a multivariate GARCH model to account for potential volatility transmission. Results indicate strong price and volatility transmission effects between EU and World butter prices. EU butter shocks further spillover to palm oil volatility. In addition, there is evidence that oil prices spillover to World butter prices and World butter volatility.
Highlights
Recent changes to the common agricultural policy (CAP) saw a shift to greater market orientation for the EU dairy industry with the aim of bringing EU dairy prices more in line with World prices, which were historically significantly lower than EU prices
Butter prices started to rise again with a peak of 421 EUR (=565 US dollar (USD)) in September 2013, followed by a trough of 283 EUR (=311 USD) in December 2015. This shows that price variability has become a serious problem for farmers, processors and consumers with a need for appropriate risk management tools to cope with this increased variability
In this paper, a VAR14 model is combined with a multivariate generalized autoregressive conditional heteroscedasticity (GARCH) model
Summary
Recent changes to the common agricultural policy (CAP) saw a shift to greater market orientation for the EU dairy industry with the aim of bringing EU dairy prices more in line with World prices, which were historically significantly lower than EU prices. Prices for EU butter increased from 209 EUR per 100 kg (=290 USD) in January 2009 to a high of 424 EUR (=608 USD) in July 2011 before falling back to 241 EUR (=306 USD) in May 2012 After this trough, butter prices started to rise again with a peak of 421 EUR (=565 USD) in September 2013, followed by a trough of 283 EUR (=311 USD) in December 2015. Butter prices started to rise again with a peak of 421 EUR (=565 USD) in September 2013, followed by a trough of 283 EUR (=311 USD) in December 2015 This shows that price variability has become a serious problem for farmers, processors and consumers with a need for appropriate risk management tools to cope with this increased variability. While this issue has been addressed by both the private market
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